Personal Finance Essentials
Social Security and Pension Benefits for Couples
The Pension Decision You Make at Retirement
Could Haunt Your Spouse for Decades
Social Security Spousal Benefits
You can collect Social Security based on your spouse’s work history if you are 62 or older. This applies even if you are divorced from your spouse, provided the marriage lasted 10 or more years. For many couples – particularly those where one spouse worked fewer years – this spousal benefit can be a meaningful part of retirement income.
Among Social Security beneficiaries, 54% of married couples and 74% of unmarried people receive half or more of their household income from Social Security. For 21% of married couples and 43% of unmarried people, it provides 90% or more of their income. These figures underscore how important it is to understand and maximize this benefit, not simply accept whatever default amount arrives.
Pension Survivor Benefits: Single Life or Joint and Survivor?
Most workers entitled to a pension at retirement are offered two primary choices: a single life annuity or a joint and survivor annuity. The single life option provides a higher monthly income for as long as you live – but stops completely when you die. The joint and survivor option pays a lower monthly amount but continues paying as long as either you or your spouse is alive.
Consider a retiree who can choose between $3,500 per month under the single life option or $2,650 per month under the joint and survivor option. The $850 monthly difference is the cost of protecting a surviving spouse. Federal law requires a spouse’s written consent if a worker chooses anything other than the joint and survivor option – because it is the spouse who is at risk.
There are important restrictions to understand with the joint and survivor option: the lower income is permanent, even if the spouse dies first. You cannot return to the higher single-life amount. You cannot change the beneficiary. When the surviving spouse dies, all benefits stop – there is no inheritance for children or other heirs.
Pension Maximization: An Alternative Strategy
Some retirees choose the single life option and use the higher monthly income to purchase a private life insurance policy – a strategy called pension maximization. Instead of accepting the employer’s built-in survivor benefit, you create your own. If executed correctly, this approach can provide more flexibility and, in some cases, more total benefit for both spouses.
The strategy is not without risks. The retiree must be healthy enough to qualify for life insurance at an affordable rate. If income drops, premiums may become unaffordable. If the marriage ends, the retiree could cancel the policy, leaving the ex-spouse unprotected. And if the surviving spouse is not experienced in managing a lump sum, the death benefit could be mismanaged. Before pursuing pension maximization, consult with a financial advisor who can model both options under your specific circumstances.